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Reserved Bank Of Australia Statement and China's Political Instability

This Invast Insights report touched on three important topics - the Reserve Bank Of Australia (RBA) statement, Brent crude and the Zeng Qinghong corruption issue. The RBA is not sure whether the global economy is now in a good condition so it emphasized the importance of stability of interest rates. While, Trading charts show that Brent crude is looking vulnerable with the possibility of a temporary pullback. Observing indices like the Dow Jones, the markets continued to fall lower during the first quarter of this year. We also kept watch on China's political instability in relation to Chinese President Xi Jinping’s anti-corruption campaign. His next target is Zeng Qinghong.

Reserved Bank Of Australia Statement and China's Political Instability

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Invast Insights
Week Commencing February 10, 2014

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This week we look at the following topics:
1.0 RBA Statement & what you didn’t miss
2.0 New ASX small caps for your watch-list
3.0 Brent crude about to break-out?
4.0 Technical outlook for the Dow Jones
5.0 Zeng Qinghong – write the name down

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1.0 RBA Statement & what you didn’t miss
If you didn’t read the Reserve Bank of
Australia (RBA) statement today, you haven’t
missed much. Unless you have a couple of
free minutes in your day, the rest of this note
is not really that necessary. For those with
some time to ponder, read on. There
basically was no real new news, again a
whole statement about where the economy
is and despite higher than expected inflation
the RBA is still expecting the rate to remain within the target range of 2-3%.
The RBA knows very well that what happens overseas is really the key driver
for where Australian rates are heading. It is very difficult to see the RBA raising
rates when the yield on US 10 year treasuries is falling and at last check
somewhere in the order of 2.50%. If there was one line worth reading in the

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RBA statement, we think it would have been the last one. The sentence said
“…on present indications, the most prudent course is likely to be a period of
stability in interest rates…” That means the RBA still hasn’t figured out if the
global economy is back in good enough a condition for it to start increasing
interest rates. The situation is not bad enough to consider more cuts so 2014 is
likely to be a year of waiting and seeing. Don’t expect much.
Bottom line: Interest rates will remain low in Australia for some time yet. The
key risk is a rise in the rate of unemployment and any increase in inflation is
still unlikely to spook the RBA until it starts rising consistently above the 2-3%
target band range. We need at least two more quarters to confirm this. US 10
year bond yields are the key trigger – if they continue falling then the
appetite for global risk assets will continue to fall. The Australian dollar spiked
briefly on the RBA statement but still remains within a downward trend.
Shorts were squeezed but any upward momentum on solid volume, over a
prolonged period of time, is difficult to see until global appetite for risk
reverses. If you’re expecting an excitement from the RBA in 2014, you may be
disappointed.

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• The 78.6% Fibonacci retracement off January’s fill is currently at around
0.900 where we see resistance. This is the “gateway” level and the most
important to watch.
• Any break above this level could see the next resistance tested at 0.9015
and then somewhere in the order of 0.9200-0.9300.
• Any failure of the 0.9000 gateway level could see downside support at
0.8850 and 0.8800 – both these are the previous support and resistance
levels as well as the 50% and 38.2% Fibonacci retracement levels.
2.0 New ASX small caps for your watch-list
While the mainstream media and finance community ponder on the falls in
the global indices and the RBA decision, we at Invast have our head down
working hard to find you more hidden gems listed on the ASX. Our first
publication introduced 15 hidden gems which were revised and updated in

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in our 2014 Forecast Guide special report. The performance of those stocks
has been excellent and even surprised us. The three stocks we introduced
were Adslot (ADJ), Mobile Embrace (MBE and Moko.mobi (MKB) which has
since been renamed.The report was published on 9 September 2013.
As of the time of writing the three stocks are up 72%, 105% and 235%
respectively. This might be hard to believe but you can check the price
performance for yourself. We didn’t expect such a large magnitude of gains
but our premise was that while most of the market focuses on where BHP, Rio
Tinto and the Big 4 banks are heading we think the smart money is focused
on the small growth opportunities which go under the radar. Regular readers
of this report will also note that we have been closely monitoring the
performance of Ellex Medical (ELX) which has also been a solid performer
since we first introduced the stock and have published our interview with the
CEO over the past couple of weeks.

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Most fund managers don’t catch onto these businesses until the large gains
have been made. At Invast we aim to bring you these opportunities where
possible – there will be times when we get them terribly wrong and other
times where we see phenomenal returns like the three stocks above so you
need to take this into consideration.
At no point do we consider our selections to be perfect or immune from
shocks. The three stocks mentioned above can easily fall in value overnight.
They are small businesses and liquidity in trading can cause large levels of
volatility. So with that in mind we have a selection of new businesses that we
think are very well placed to benefit this year.
Freedom Foods (FNP) – Australian food and agricultural businesses have
come under the spotlight after the much publicised takeover battle for
Warrnambool Cheese and Butter (WCB). One of the stocks on our 15 hidden
gems list published in August was Webster Limited (WBC) – a land based
good production company with two main operation businesses in walnuts

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and onion production. The stock has rallied more than 60% over the past six
months. We think Freedom Foods (FNP) has similar attributes and is shaping
up like a very attractive business.
Freedom has a market value of around $375m and is
trading on a very high price to earnings ratio –
somewhere in the order of 50x but there is room and
scope for significant upside. The business
manufactures food in to the niche nutrition and long
life markets. It also owns around 18% of New Zealand
listed A2 Corporation – you might recognise A@
products in your supermarket is you have intolerance to certain types of
lactose based products. Freedom is starting to leverage its production
facilities – its Pactum product range white labels long life milk and other
similar dairy products, it has specialty seafood brands and is pushing into
the nutrition space in the United States with distribution deals in major
supermarket chains.

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Gearing (debt/equity) is now down to 10% which means the business can
draw down on its debts and make attractive acquisitions. This stock is a major
play in the growth of the world’s population and demand for food
manufacturing businesses. The world’s population is projected to rise to 9.1
billion people by 2050 which will require a 70% increase in food production
over the next forty years. Many food producers use genetically modified
organisms (GMO) but Freedom has built its business around excluding these
and opting to produce and market a more natural range of products through
its supply chain.We think it is worth a close look.
Analytica (ALT) – We believe biotechnology stocks are a great way to lose
money. Out of all the blue sky stories that your author has seen over the years,
very few actually make money yet alone post positive returns to shareholders.
Most businesses in the biotechnology space end up going broke, running out
of cash before they can commercialise their technology. It’s not that the
technology itself isn’t interesting, but it takes exceptional management and a
bit of luck to take an idea through the regulatory hurdles and then into
commercialisation, without completely diluting shareholders into oblivion.

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As your author writes this report his wife is expecting to deliver her third child
– one of the many joys in life. You might be asking what this has to do with
investments and stock selection. Analytica have
a key product that helps in the treatment of
female incontinence – one of the
inconveniences of females falling pregnant. It’s
not just pregnancy, Analytica estimate that this
impacts one in three women. The key product
produced by Analytica (image on the left) to
target this health issue is called PeriCoach and
you can judge for yourself its success by visiting
www.pericoach.com.
We reason we think this stock is worth adding to your watch list is because the
market capitlisation is currently at around $16m and the business has around
$1.4m in cash which might be enough to see it through until cash starts rolling
through from sales of its products.This is an Australian product which has the
potential to help change people’s lives. The probability might be very low of

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this actually succeeding but the payoff is massive if things work out well. The
business raised $2.2m in an underwritten placement via Patersons Securities
in October so there does seem to be some corporate support if cash dries up
again. The board was recently boosted by the appointment of life sciences
industry veteran Carl Stubbings who joined last month. The chart below
summarises where Analytica is in its commercialisation process. Image
sourced from November investor presentation.

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Nearmap (NEA) – You have probably spent time on Google Maps and seen the
amazing work that the free service has to offer. You can zoom into your house
from a street or satellite view and a whole industry has grown off the back of
of this. Real Estate agents now
and easily incorporate
Google’s data into their listing
to help market your property,
builders and trades people can
quickly review the nature and
scope of your house and a
whole list of other professions
benefit from this amazing free
service. Nearmap is in the
same space – it provides high
resolution aerial images to a
whole list of clients including
professionals like agents and

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architects plus governments and construction businesses looking at scoping
work.
Nearmap recently signed an agreement with Google. Nearmap will provide
high resolution coverage maps to areas that aren’t already captured by
Google’s own imagery. Nearmap now has agreements with Amazon and
Google. The technology covers more than 85% of Australia’s population. The
current market capitlisation of the business is sitting at around $185m but the
business is yet to book a profit, barely profitable at the operating level. The
market is of the view that more clients will eventually opt to pay for
Nearmap’s high resolution imagery and content providers will start
integrating more of their business functions off these features. Google for
example plans to launch driverless cars, has purchased taxi booking software
providers and looking at potentially integrating this all into their business
model.

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It’s unclear if Nearmap will continue to evolve or become an obsolete product
provider in the next ten years. Melbourne IT is a perfect example of a business
that once had a dominant position (the only domain registrar of .com.au in
Australia) but then was subject to competitive pressures as the online and
technology space evolved. Nearmap has rallied hard over the past year, the
shareprice has risen by multiples but net operating cashflow continues to
build solidly so we think it still deserves to be on your watch list and perhaps
even part of a very well diversified portfolio. It has the potential to be a
game-changer, if management can execute well and commercialise the
technology. We aim to speak to the company in the coming weeks and report
our findings in the same way we did for Ellex Medical (ELX) via a CEO chit-chat
section.
1300 Smiles (ONT) – Fancy a visit to the dentist? 1300 Smiles is likely to be one
of your dental clinics if you live in one of the ten most popular cities in
Queensland. The business also recently launched into Adelaide. It’s not usually
one of the first stocks investors think of when looking for exposure into the
small cap spaces but ask any of your friends and relatives which profession

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they think make good money and
there is no doubt that dentists will be
on the list. We like the businesses
because it has scale capabilities, it has
the ability to expand into other parts of
the country and become a national
brand with marketing and operating
cost advantages – like Specsavers for example. The dental industry is
currently going through a rough patch after the removal of a government
scheme which subsidised dental work for those on low incomes or with
chronic diseases. Like all government subsidies this created and artificial
inflation in the earnings of the average dentist practices. As the work dried up
in a very short period of time, many dentists were left with an earnings gap
and so there has been widespread angst with some looking at exiting the
industry or opting for early retirement. The long term demand for oral
services by a dentist meanwhile continues to remain strong, particularly with
an ageing population.

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Smiles has been successful in working with the public sector who is starting
to outsource certain dental procedures for which waiting times have risen to
an unsustainable 10 years in some cases. It’s a nice niche business that we will
continue to monitor.
3.0 Brent crude about to break-out?
We recently published an update on the Brent crude prices where we noted a
rejection around the Ichimoku cloud region. While we are generally more
bullish than bearish on energy this year – we wrote extensively why in our
2014 Forecast Guide earlier in January – there could be a temporary pullback
which will create a medium term buying opportunity.
Brent crude is looking vulnerable on the charts as of the time of writing. Click
on the video like above to hear Vito Henjoto talking talk through charts and
giving his exact levels. We have a strong rejection at around the US$108 per
barrel level, the level has been tested at least six times over the past two

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weeks and there has been a strong rejection near this level. On the downside
US$105.25 will be a key test level – a level we mentioned last year where we
though Brent would trade within the $103-112 range. We are now tightening
that range.
4.0 Technical outlook for the Dow Jones
We continue to see the markets falling lower in the first quarter of this year, as
advised in our 2014 Forecast Guide special. As you can tell we have mentioned
this document several times now in this report and so it’s worthwhile casting
another eye over it in case you have forgotten some of our key calls. The Dow
Jones is one of the indices which we continue to see downside momentum,
US corporate results have been reasonable but they have not performed as
well as expected. When the market rises analysts boost their earnings and
good corporate earnings eventually become a victim of their own success. The
expectations bar continues to rise towards unrealistic levels.

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This downturn is welcomed, we are starting to see more sensible valuations
which is very important for the long term sustainability of equities markets.
For the US30 Index we see the following:
• Temporary base support potentially around 15,363 level despite the large
falls already booked
• We see momentum still to the downside, major test will be at around
15,700 to see if that level can hold on any short term rally of if this is
rejected then continuation to the downside.
• The US30 is now trading below the Ichimoku cloud on the daily
timeframe, not seen since last October. On the weekly timeframe we still
haven’t touched the Ichimoku cloud so still room for more downside. If
support gives way at 15,363 area then we could see next support level all
the way down at 14,200 range.

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5.0 Zeng Qinghong – write the name down
We’re hearing rumours that the next target for Chinese President Xi Jinping’s
anti corruption campaign is Zeng Qinghong – write down the name. We aren’t
sure if these rumours have any substance but if they do turn out to be true
the ramifications of
prosecuting somebody
like Zeng are significant.
Zeng served as chief of
the Communist Party’s
powerful Organisation
Department and sat on
the previous Politburo
Standing Committee
under the former
President Hu Jintao. He
is a senior figure, albeit

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albeit from the former regime.
Any efforts to prosecute Zeng will be met with large pushback and resistance.
We have already seen the huge political stalemate from the prosecution of Bo
Xilai – a former member of the Politburo and secretary of the Communist
Party’s Chongqing branch. The decision to target Zeng – if the rumours are
true – either suggests that Xi’s administration is confident in its position or is
desperate to strip its opponents of power. The Chinese rumour mill often
contains fabrications but occasionally – like the case with Bo Xilai and Zhou
Yongkang – reveal some truth. Zhou is believe to be under close supervision
and while he has not been official prosecuted yet, his involvement in the state
owned oil sector and energy bureaucracy was aided by Zeng’s promotion.
We’re not sure what will come of this but China is at a crucial moment in
history, political instability is the greatest threat to the entire system and
while we are bullish on China’s long term prospects, we will continue to watch

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rumours and anecdotal evidence that might evolve into a large scale political
crisis. For now, we just want you to take note and write down the name.
Read through our blog for more relevant trading insights.

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7.0 Disclaimer
Please note that you are receiving this report complimentary from Invast
Financial Services Pty Ltd (AFSL 438 283). Invast staff members may from time
to time purchase securities which are included in this or future reports. The
authors of this report may or may not be holding a position in the securities
mentioned. Please note that the information contained in this report and
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purposes and should not be construed as a solicitation or offer to buy or sell
any financial product. Invast Financial Services Pty Ltd is regulated by ASIC
(AFSL 438 283 | ABN 48 162 400 035).

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